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For this month’s Focus Group Survey, we asked 19 readers about hedge funds. First, we split respondents into the 11 that don’t allocate to hedge funds and the eight that do. Lack of transparency and relevance were the most important issues for the refuseniks, but fees scuppered the deal for five of them.

However, when we asked those who do allocate to rank the importance of 10 things that might influence their view of the industry, fee levels and fee structures appeared less important.

Do investors who take the plunge hold their noses at the charges? Do they perceive value-for-money differently? Or has working with funds taught them that there is room for give-and-take on fees?

These are important questions, because neither rejecting the entire sector for its ‘high fees’, nor paying over the odds for alpha, is reasonable.

There is more talk today about fee structures rather than fee levels, but the discussion still needs to go much further. One often hears that investors prefer performance fees over management fees, for example – but why?

You might assume that a 20% performance fee means that you get to keep 80% of the upside – but that is only true if you split the profits with your manager at the end of your investment period. If he periodically banks his fee, his share of the cumulative profits depends on the volatility of those profits. After a big down year, you both share a smaller pie, but your manager will probably get a bigger share than 20% unless you implement a clawback. A manager running a strategy with a fat left tail could build the pie up over a cycle and, when disaster strikes, run off with 30-40% of it. Fee structures for that strategy clearly need careful consideration.

To what extent should a manager go without fees during difficult times? It’s been years since investors expected hedge funds to do well every single year, but fee structures fail to account for this. CTAs are struggling, so a focus on performance fees could incentivise them to tinker with their models until they outperform today’s rising, noisy markets, at the risk of undermining their core function. Similarly, investors have waited years for distressed debt to have its moment: allocating cash to specialist managers in 2009-10 was probably the right decision at the time, and sitting on that cash rather than chasing performance via style drift was the right thing for managers to do, too.

What are the fairest fees for these situations? Not 2-and-20, but not zero, either. They will vary with manager size, strategy and market environment. Fairness therefore requires genuine dedication to client relations and transparency, with all the investment in time and resources, by both hedge funds and pension funds, that that implies.

Our Investing in Hedge Funds report and Focus Group survey both suggest that, even as assets continue to flow, most investors that work with hedge fund managers seem to feel they now engage more. That is why, for them, the fees debate is only as important as client relations.